Steve Hamilton is a Tampa native and a graduate of the University of South Florida and the University of Missouri. He now lives in northern Kentucky. A career CPA, Steve has extensive experience involving all aspects of tax practice, including sophisticated income tax planning and handling of tax controversy matters for closely-held businesses and high-income individuals.

Tuesday, November 12, 2013

If A Tax Credit Falls In The Woods And No One Hears It ...

I am looking at a proposed rule for
the Section 45R credit for small employers that offer health insurance. The IRS says I have until November 25 to
respond with comments.

Let’s talk about nonsense that tax
practitioners have to work with.

This credit was added as an
inducement for smaller employers to provide health insurance while waiting for
the balance of the ObamaCare scaffolding to be erected.

As credits go, it was cumbersome to
calculate and – by many reports – quite ineffective.Many practitioners consider the credit to be
such a joke they will not even bother to calculate it. Why? The professional
fee to calculate the credit could be more than the credit itself.

The restrictions on the credit
eviscerated almost any benefit it could provide.

(1)The credit applied to firms less than
25 employees. However, its sweet spot was ten employees, and the credit began
to phase-out in excess of that number. That
eleventh employee would cost you when calculating the credit.

(2)The credit phased-out when average payroll
exceeds $50,000. It sweet spot was $25,000 or less, and the credit began to
phase-out in excess of that number.Many
of us were quizzical on the $25,000 strike, as average American household
income is approximately twice that amount. Maybe Congress was dividing the
average household income between two spouses. Who knows.

(3)Owners and their families were excluded
from the credit. For many small businesses, the owner and family are a
significant portion, if not the majority, of the work force. Congress had already
imposed the 10/25 and $25,000/$50,000 rules, so was it necessary to also have
an “off with the owners’ heads” rule?

COMMENT: Someone please explain to Congress that excluding owners
from a tax incentive is not incentivizing.

(4)There was a cumbersome calculation of
“full-time equivalents” that may have tested the limited accounting resources
of many small employers.

(5)The employer had to pay at least 50%
of the premiums for all employees to qualify for the credit. This may be the
least onerous requirement.

The credit – when finally calculated
– was 35% of the health insurance premiums remaining after excluding the owners
and running the two phase-outs.

… and the company had to reduce its
tax deduction for health insurance by that 35%.

The credit will still be available in
2014, and it has been expanded from 35% to 50%. However the credit can only be
used two more times, so if an employer uses the credit in 2014 and 2015, that
employer has exhausted its maximum Section 45R mandated remaining number-of-years.
Why? Who knows.

In addition, the employer has to
obtain its insurance through the Small Business Health Options Program (SHOP).

NOTE: SHOP is the company-sponsored health insurance Exchange
and is the counterpart to the individual health insurance Exchange.

The credit will not be available if
the employer provides insurance through other means, such as through an
insurance agent.

COMMENT: Think about that for a moment. Why is the credit
unavailable if one purchases insurance for one’s employees through an insurance
agent, a professional one may have used and relied upon for years? How does
this requirement have the employees’ best interest at heart? I am at a loss to
see any business reason for this. I immediately see a political-hack reason for
excluding health insurance that is not sitting on a government website, however.

Let’s go though some recent headlines
as we step through the looking glass:

SHOP
was to be accessible starting October 1, as were individual policies.

The
SHOP website is accessible through HealthCare.gov, or it would be assuming the thing
ever works.

The Obama
administration said in 2011 that SHOP would allow small employers to offer a
choice of qualified health plans to their employees, akin to larger businesses.
This “choice option” was to be available in January 2014. Administration
officials have said they would delay the “choice option” until 2015 in the 33
states where the federal government runs the exchanges. This means employers would
have only one plan to choose from for 2014.

COMMENT: Think about that “choice.”
Yep, small businesses will be lining up to buy this thing.

The
Obama administration announced on September 26 that the opening of SHOP would
be delayed a month, until November 1.

On
Tuesday, October 29, 2013, Marilyn Tavenner, the Head of the Center for
Medicare & Medicaid Services, said the SHOPS would be functional “at the
end of November.”

COMMENT: That is how Steve Jobs
expanded Apple – by demanding “functional.” Shoot for the stars there,
government bureaucrat.

Businesses
seeking coverage effective January 1, 2014 must enroll by December 15. Remember
Ms. Tavenner’s comment about the “end of November.” This means that small could
have as little as 15 days to enroll in SHOP.

In the Administration’s defense, the
SHOP can admit employees throughout the year, so its January 1 start is not as
critical as the individual Marketplace.

What is on the other side of the looking
glass?

A
cumbersome credit calculation …

That
will expire after two more uses …

For
health insurance a small business may not be able to buy, resulting in …

A
tax credit that approaches a work of fiction.

The bottom line is that the credit
was almost useless before, and it is more useless now.

About Me

Thirty years years in tax practice. It's a long time, and I have seen virtually everything short of the fabled tax-exempt unicorn. I was raised in Tampa, went to school in Missouri, taught at Eastern Kentucky University, lived in Georgia, got pulled to Cincinnati when I married, have in-laws in England and a daughter going to the University of Tennessee. I am not sure where I will wind up next, but I hope there is better weather.